Principles of Food and Resource Economics

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Principles of Food and Resource Economics

• AEDE 200
• Brent Sohngen
• Spring 2005

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AEDE 200 Description

• Review Syllabus
• Book Arnold, 6th edition.
• Website http//aede.osu.edu/class/aede200/sohngen
  /
• HW Policy
• 10 points per day until answers handed out, then
  0.
• Exam Policy
• Two midterm exams and a final exam
• The final will be comprehensive
• Make-ups only given if a proper excuse is
  provided in advance.
• Other

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What will you be able to do after this course?

• Analyze economic problems.
• Understand how markets allocate resources.
• Analyze trade-offs in resource use.
• Analyze the effects of economic trends and
  government policies on business and consumers.
• Identify problems related to resources and
  environmental goods and services.
• Appreciate the economics of international trade.

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What is Economics?
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What is Economics?
From http//www.djindexes.com
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Why is it Important to Understand Economics?

• Economics is about choices and decision-making
• Can help us make better informed decisions in our
  own lives
• Examples
• Purchase a car now or later?
• Interest rates, prices, re-sale value, other
  transportation choices.

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Importance

• Economic trends affect us
• Business cycle and employment
• What sector do I choose to work in?
• Interest rates
• Prices
• When will gas prices come down?
• Government Policy affects us
• Farm/Food sector subsidy payments
• Social Security
• Minimum wage
• Interest rates

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Important Introductory Concepts

• Scarcity
• Opportunity Costs
• Marginal Concepts
• Efficiency
• Equilibrium
• ceteris paribus

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Scarcity

• Resources are at their heart limited, or scarce.
• All Resources are Scarce
• Examples of Scarce Resources
• Oil, Forests, Fish
• Labor.
• , Capital

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Opportunity Costs

• All activities require giving up something else.
• Time
• Recreation vs. work
• Land
• Crops vs. Trees or Devel.
• Loans
• Money today vs. future

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Marginal Concepts
3.50

• We value things marginally
• Purchases The first one is more valuable to us
  than the second, which is more valuable to us
  than the third.

3.00
2.50
1.00
???
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Marginal Concepts

• We value things marginally
• Purchases The first one is more valuable to us
  than the second, which is more valuable to us
  than the third.
• Production The same applies, BUT additional
  units are more costly to produce

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Efficiency

• What is the right amount to buy?
• What is the right amount to sell?
• Efficiency the right amount is sold and
  bought.

Marginal Benefits of studying 1 more hour
Marginal Costs of Studying 1 more hour
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Efficiency
MB, MC
MB MC
MC MB
Time Studying
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Some Additional Terminology

• Micro versus macro- economics
• Micro economics Individual decisions, analysis
  of markets
• Macro-economics Decisions that affect an entire
  country.

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Additional Terminology

• Theories Like hard science, economics relies
  on proposing and testing theories
• Example Many economic models are built on the
  hypothesis that consumers behave rationally.
• Chapter 6 describes several examples of
  irrational behavior that cannot be explained.
• Spite, affect, etc.
• Normative vs. Positive.

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Additional Terminology

• Fallacy of Composition
• Causation
• Difficult in science

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Additional Terminology

• Fallacy of Composition
• Causation
• Difficult in science
• Difficult in economics

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Additional Terminology

• Fallacy of Composition
• Causation
• Difficult in science
• Difficult in economics
• Difficult in Medicine

• Smoking..
• High Fiber Diet..
• Etc

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Additional Terminology

• Unintended Consequences
• Economists like to point out the unintended
  consequences of policy actions that are directed
  at individuals
• Example Dairy herd buyouts in 1980s
• Reduced herds temporarily.
• Raised prices, and induced movement back into
  sector.
• Example Carbon sequestration in forests or
  agricultural soils

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Basics of the Economic System
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Producing goods is complicated

• Organizing the production of a single output is a
  fairly complicated logistical problem

Inputs (Resources or Factors of Production)
Land, Labor, Capital Management,
Outputs (Products)
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Production Possibilities FrontierTrade-offs
within a Factory
A All Light B All Premium
A
Cases of Light Beer
B
Cases of Premium Beer
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Key Point

• Law of diminishing returns
• Or, Law of increasing opportunity costs.

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Efficiency
Efficient Production Along PPF
A
Cases of Light Beer
This point is Inefficient -- Gains possible
without reducing Production in other area
B
Cases of Premium Beer
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Technological ChangeProductivity Increases, i.e.
1990s
A
Cases of Light Beer
B
Cases of Premium Beer
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Technology Change ExampleCorn Yields in
Agriculture
Source USDA Foreign Agriculture Service
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Methods for Organizing ProductionOr Making
Choices

• Capitalism
• Consumers and producers make free choices
• Command Econ.
• Government chooses
• Mixed System
• Consumers and producers decide, but government
  has a hand

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How does capitalism work?

• Consumers Demand products
• Offer their willingness to pay (WTP) by stating
  prices or choosing to buy a good at a given price
  offered (E-bay, stock market, grocery store,
  farmers mkt, newspaper ads, etc.)
• Producers figure out how to get the products to
  the places where consumers can access them
• Production Cost WTP Fewer goods sold
• Production Cost More sold, subject to
  law of diminishing marginal returns, etc

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• Resulting Equilibrium prices tell producers and
  consumers how much to buy and how much to
  produce.
• Theory says this results in a more efficient
  allocation of scarce resources than if government
  decides how much to produce..

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Benefits of Capitalism

• Decentralized decisions increases Welfare
• Consumers have a better chance of getting what
  they want
• Producers are better suited to figuring out what
  consumers want than government.
• Incentives for efficiency
• Inefficient producers will drop out of market.
• Move towards comparative advantage in production
• Technology change
• Drive to efficiency requires exploration and
  discovery.

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Limitations to Pure CapitalismHave lead
historically to efforts to regulate the economy

• Market imperfections
• Monopoly, oligopoly, etc.
• Anti-trust Oil in 19th century, IBM in 1980s,
  Microsoft in 1990s.
• De-regulation Airlines and trains in 1980s,
  electricity (sort of) in 1990s.
• Externalities
• Pollution Un-priced outputs cause damage.
• Asymmetric Information
• Insurance

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Other Issues that have led to government
intervention

• Income inequality
• Has historical led to a range of government
  interventions
• progressive tax structures (higher marginal
  rates) in much of the developed world.
• Subsidies to poor (welfare, agricultural
  subsidies,
• Minimum wage laws
• Subsidize education

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What do we know historically

• Pure Command economies do not work.
• Russia, China before 1970s 80s
• Government intervention that is too strong seems
  to slow growth.
• European economies have under-performed US in
  recent years, but
• Few pure capitalist systems left in the world

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Source Heritage Foundation/Wall Street Journal
Index of Economic Freedom